PGIM and TIAA Rethink 4% Withdrawal Rule, Finding Retirees Can Spend More

Determining a reasonable retirement savings withdrawal rate must be personalized to an individual’s needs and circumstances, separate PGIM and TIAA data shows.

The standard 4% rule is useful as a starting point, the firms’ research found. The insights are prompting the firms to develop new interactive tools that could help individuals make plans for reasonable withdrawals.

Retirees can safely spend down retirement account assets at a rate higher than 4% without depleting their savings in old age by monitoring account balances regularly and making tradeoffs like converting some savings into guaranteed income, the two firms found.

PGIM and TIAA both concluded that 4% is a reasonable initial withdrawal rate.

PGIM’s research also incorporated retirees’ decision-making and ability to make spending changes if needed; while TIAA estimated how much more money today’s retirees could receive in the first year of retirement if they annuitized part of their retirement savings with a TIAA guaranteed income product.  

PGIM’s Paper

PGIM’s data offers perspective to DC plan sponsors, advisers and participants on how to use guided spending rates.

Retirement plan sponsors can support their participants, implementing tools to estimate a safe withdrawal pace above 4%, finds PGIM’s research paper “Guided Spending Rates: Rethinking ‘Safe’ Initial Withdrawal Rates.”

PGIM’s research “uses a model that is far more realistic than what you commonly see used to determine withdrawal rates today,” explains David Blanchett, head of retirement research at PGIM DC Solutions and author of the paper. “Five percent really is a better starting place for the average American retiree than 4% [with] all the factors that go into retirement spending.”

PGIM’s findings presented a series of guided spending rates, varying in the level of spending flexibility—conservative, moderate and enhanced—for three distinct retirement horizons 40 years, 30 years and 20 years.

Using this approach a retiree who spends at a moderate level and has a 30-year retirement period with a 5% withdrawal rate would experience an initial withdrawal rate 25% higher than the 4% rule without compromising the longevity risk of outliving savings, finds PGIM.

There were notable variations over time, but the conservative, moderate and enhanced guided spending rates are approximately 4.0%, 5.0%, and 5.5%, respectively, on average.

Historically, based on interest rates there is notable variation in the guided spending rates. When interest rates were low in 2021, the spending rates dropped, suggesting retirees must periodically check portfolio withdrawal rates as market situations change, writes Blanchett.

“We’re going to update these, quarterly-ish going forward,” adds Blanchett.

The PGIM paper was based on Blanchett’s academic writing.

In 2022, Blanchett published a paper in the quarterly peer-reviewed academic periodical Financial Analysis Journal covering investment management.

PGIM is “building a tool,” showing safe withdrawal estimates, says Blanchett.

“We’re going to have a microsite where you can access them relatively easily to get a better sense of what is a good spending rate today based upon the current economic climate,” he adds. “What these can do is give participants a better framework for what they should be targeting in terms of required savings at different ages.”

Problematic Modeling

Many models and tools used today use success rates to measure outcomes, skewing the estimates Blanchett says.

Metrics to consider the proportion of the goal achieved offer a more balanced perspective, informing more tailored and potentially less restrictive investment guidance, he says.

For more accurate withdrawal estimates, a better approach is to consider the total amount of the goal achieved each year and if there is a shortfall, gauging the possible implications on the shortfall for a retiree, he adds.

Existing withdrawal rate models suffer from three common gaps, explains Blanchett in the paper.

• Ignoring other income streams. Many individuals receive some form of guaranteed lifetime pension benefit such as Social Security.
• Lack of spending flexibility. Traditional models often do not include the desire or ability to adjust spending during retirement, with withdrawals assumed only to change by the rate of inflation.
• Inadequate evaluation of outcomes. The seminal, oft-cited research—published in 1994 by William Bengen, which benchmarked safe withdrawal rates at 4%—determined reasonable withdrawal rates by focusing on whether the goal is accomplished in its entirety.

“The biggest issue with this metric is that it ignores the magnitude of failure, or the percentage of the goal that was completed,” says Blanchett.

TIAA Touts Additional Annuity Income

TIAA has marketed converting portions of retirement savings into an annuity as one way retirees can boost their safe withdrawal rates, according to an article the firm posted online and documents seen by PLANSPONSOR.

The TIAA Annuity Paycheck Advantage shows individuals the difference between what a first-year retiree can spend using the 4% retirement spending formula and the amount of money they could receive by converting part of their savings into TIAA guaranteed annuity at today’s interest rates.

In 2024, if a 67-year-old new retiree converts one-third of their savings to an annuity with a 10-year guarantee period through TIAA’s guaranteed annuity products and takes a 4% withdrawal on the remaining balance, they will receive 32% more to spend each month in their first year of retirement than if they applied only the 4% withdrawal rate to their savings balance, finds TIAA.

“We are going to have [an interactive] tool, [showing withdrawal rates]: it’s working its way through IT and compliance,” explains Benny Goodman, vice president with the TIAA Institute. TIAA’s tool will be interactive, accepting age, total balance and the portion of savings to be annuitized data to estimate withdrawals.

The tool will assume a 4% base withdrawal rate, and “the plan would be to limit the age range—you can’t put in 50—maybe 59½ would be the lowest age and probably 73 would be the highest age,” says Goodman.

TIAA plans to update the Annuity Paycheck Advantage metric annually to provide current information.